Risk management costs, limited capital cause of high interest rates - AMIR

Insufficient liquidity and high risk of lending have been blamed for the high interest rates in the microfinance industry. The blame follows accusations from the borrowers that the sector still charges high rates as compared to commercial which contradicts the idea of lifting people out of poverty. However, according to the experts at the Association of Microfinance Institutions in Rwanda (AMIR), limited capital, high risk to lend and need to secure a profit for the sustainability of business, are the reasons why the rate is still high. Most MFIs charge between 10 to 25% interest. Jean Marie Vianney Nzagahimana, AMIR’s chairman said that bringing down rates will require a concerted effort from all stake holders including strengthening the country’s savings culture to increase deposits. According to Nzagahimana, the risk of lending in microfinance is higher than in commercial banks due to lack of collaterals from borrowers. “Unlike commercial banks, where you are required to have collateral before securing a loan, for MFIs and Saccos, lending is often done on the basis of understanding and trust which partly explains why interest rates are high,” Nzagahimana said. Nzagahimana, who was speaking during the Rwanda microfinance day “live talk show” in Kigali, added that the situation has often resulted into bad loans thus impacting the profitability and growth of the sector. It often becomes difficult for one to balance his profits when in the first place his source of capital is expensive and borrowers are not paying back, he added. According to statists from the National Bank of Rwanda (BNR), the sector’s asset grew by 23.8% from Rwf128.7 billion in December 2013 to Rwf159.3 December 2014. And though the sector’s performance was largely driven by loans which increased by 22.4% during 2014, Denise Murebwayire, the in charge of credit and lending at COOPEDU Ltd one of the credit institutions, said it is still not enough to guarantee long term lending. “For sustainable financing and lower rates, we will have to first address the challenge of limited deposits to be able to talk about long term lending and consequently bring down interest rates,” Murebwayire told Business Times. We are talking about guarantees to be able to bring down these rates and consequently balance our social responsibility with economic aspect part of it, she added Though the question of high interest rates is not yet answered, Peter Rwema, the association’s executive Sectary, said that the rates have been cumulatively brought down over the last two years, thanks to new innovations and technologies. “We are talking about new technologies that are helping in reducing the cost of operation and transaction; such innovations including mobile and electronic banking have the capability to bring down the cost of finance,” Rwema said. According to Joseph Museruka the Director General, Umwalimu SACCO, credit institutions must cooperate and agree on a universal affordable rate while putting into perspective the question of bad loans. “Though the sector’s bad loans deteriorated slightly from 6.8% end December 2013 to 7.0% end December 2014, there is still room for improvement.” And according to the second Economic development and poverty reduction strategy (EDPRS2), government is targeting 80% financial inclusion from current 42%. However, this could prove a difficult task if the question of high interest rates is not addressed urgently. But Daniel Muhimuzi, the Oiko Credit Ltd country manager, is confident through re-financing MFIs and capacity building, the question of high interest will be answered.

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Risk management costs, limited capital cause of high interest rates - AMIR